Note 9 – Stock Based Compensation

PetIQ, Inc. Omnibus Incentive Plan

The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”) provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultant’s. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company has 3,914 thousand authorized shares under the Plan. As of September 30, 2019, 1,987 thousand shares were available for issuance under the Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.

PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees

The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provided for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800 thousand shares of Class A Common Stock of the Company. As of September 30, 2019, no shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.

Stock Options

The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 years.

The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $1.4 million and $4.0 million for the three and nine months ended September 30, 2019, respectively and $1.2 million and $2.7 million for the three and nine months ended September 30, 2018, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant dates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periods ended September 30, 2019 and 2018:


	September 30, 2019			September 30, 2018
Expected term (years) (1)		6.25			6.25
Expected volatility (2)		35.00	%		35.00	%
Risk-free interest rate (3)		2.74	%		2.53	%
Dividend yield (4)		0.00	%		0.00	%

⁽¹⁾

The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

⁽²⁾

The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a look back period consistent with the expected option term.

⁽³⁾

The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options.

⁽⁴⁾

The Company has not paid and does not anticipate paying a cash dividend on our common stock.

The following table summarizes the activity of the Company’s unvested stock options for the period ended September 30, 2019.


							Weighted
							Average
			Weighted				Remaining
	Stock		Average		Aggregate		Contractual
	Options		Exercise		Intrinsic		Life
	(in 000's)		Price		Value		(years)
Outstanding at December 31, 2018		1,945	$	23.45		5,527		9.1
Granted		423		27.54
Exercised		(81)		19.66
Forfeited		(147)		21.20
Cancelled/Expired		(1)		21.37
Outstanding at September 30, 2019		2,139	$	24.56	$	9,323		8.5
Options exercisable at September 30, 2019		438

The weighted average grant date fair value of stock options granted during the period ended September 30, 2019 was $10.63 per option. At September 30, 2019, total unrecognized compensation cost related to unvested stock options was $14.8 million and is expected to be recognized over a weighted-average period of 2.8 years.

Restricted Stock Units

The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, all unvested RSUs will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s common stock on the date of grant. At September 30, 2019, total unrecognized compensation cost related to unvested RSUs was $3.6 million and is expected to vest over a weighted average 3.3 years.

The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $0.3 million and $0.8 million for the three and nine months ended September 30, 2019 and $0.1 million and $0.1 million for the three and nine months ended September 30, 2018. All stock based compensation expense is included in general and administrative expenses based on the role of recipients.

The following table summarizes the activity of the Company’s RSUs for the period ended September 30, 2019.


			Weighted
	Number of		Average
	Shares		Grant Date
	(in 000's)		Fair Value
Outstanding at December 31, 2018		51	$	33.16
Granted		119		27.69
Settled		(11)		25.12
Forfeited		(10)		30.91
Nonvested RSUs at September 30, 2019		149	$	29.54

There were grants of 30 thousand RSUs for the nine months ended September 30, 2018.